Ecuador’s bonds are rewarding investors with the best performance in Latin America as Chinese loans and higher oil prices boost confidence in the economy two years after the country defaulted on $3.2 billion in debt.
Ecuadorean dollar debt has returned 13 percent this year, compared with 5.2 percent for Latin American sovereigns on average, according to JPMorgan Chase & Co. Yields on bonds due 2015 fell 238 basis points, or 2.38 percentage points, this year to 9.59 percent. Similar maturity Brazilian bonds yield 1.9 percent, down 97 basis points from the end of December.
Loans from China that Ecuador says will reach at least $3 billion in 2011 and the government’s forecast for oil revenue to exceed the budgeted amount by $601 million are reassuring investors that South America’s seventh-biggest economy will keep servicing its debt, said Richard Francis, an analyst at Standard & Poor’s in New York. Government investment and consumption are driving the economy’s 12th straight year of expansion, he said.
“China is providing substantial financing that’s letting the government invest a lot more,” Francis said in a telephone interview. “This year and next year there’s no problem.”
Even after Ecuador’s Oriente crude plunged 4.5 percent yesterday to $93.29 a barrel, it still exceeds the originally budgeted amount by about $20 a barrel. Oriente has risen 8.8 percent this year compared with a 0.2 percent fall for West Texas Intermediate crude traded in New York.
The Andean country will probably grow faster this year than the 5.06 percent forecast in the 2011 budget in part because of higher oil prices due to conflict in the Middle East and energy shortages in Japan following the March earthquake, Economic Policy Minister Katiuska King said in a June 2 speech in Quito.
Government spending on projects from roads to hydroelectric dams is creating jobs and pushing local companies to increase output to meet growing demand, former Finance Minister Alfredo Arizaga said June 21 in a speech in Quito.
“The country will maintain its high GDP growth that’s being fed by substantial fiscal spending,” said Arizaga, an economist at Quito-based think tank Quantum Informe. “We’re also seeing a significant increase in private investment which offers an outlook of greater stability in economic growth.”
Ecuador’s economy expanded 6.98 percent in the fourth quarter from a year earlier, the fastest pace in more than two years. The central bank is scheduled to publish first-quarter data on June 30.
Finance Minister Patricio Rivera said last week that Ecuador is seeking a $2 billion loan from China, on top of the $1 billion that PetroChina Co., the Asian nation’s largest oil producer, released in February in exchange for future oil sales. Ecuador negotiated a similar deal with China for $1 billion in 2009.
Ecuador got a separate $1 billion, four-year loan from China Development Bank Corp. last year for infrastructure projects at an interest rate of 6 percent. The Export-Import Bank of China in June 2010 agreed to finance a $1.68 billion, 1,500-megawatt hydropower plant in the Amazon region, known as Coca-Codo Sinclair. China’s Sinohydro Corp. will build it.
The Andean country’s dollar debt yields 816 basis points more than U.S. Treasuries, the second-most among 15 emerging markets tracked by JPMorgan’s EMBI+ index, after Venezuela. Debt from Argentina, which defaulted on $95 billion in 2001, yields 636 basis points more than Treasuries.
The Chinese loans are damping concern that Ecuador will struggle to come up with financing after the default shut the country out of international credit markets. President Rafael Correa stopped payments on $3.2 billion in bonds due 2012 and 2030 in December 2008 and March 2009, saying the securities were “illegitimate” and “illegal.” The government’s bonds due in 2015 were the only global notes Correa kept servicing.
“I have given the order that interest payments not be made,” Correa said in December 2008. “The country is in default.”
Correa said in an October interview that the government is considering selling international bonds for the first time since 2005.
Ecuador, the smallest member of the Organization of Petroleum Exporting Countries, this week raised its Oriente oil price forecast by 25 percent to $91.30 per barrel from the $73.30 estimated in the 2011 budget presented to Congress in October. Oil provides the government with 24 percent of revenue, according to the Finance Ministry.
“An important test of the credit quality going forward will be their plans to tap international markets in an effort to fund fiscal imbalances,” said Morten Bugge, the chief investment officer at Kolding, Denmark-based Global Evolution A/S, which owns about $2 million of the nation’s 2015 bonds, according to data compiled by Bloomberg.
“We believe Ecuador will be able to issue again given the increasing risk appetite in emerging markets and especially in EM frontier markets, but obviously it all comes down to the yield level,” he said in an e-mail.
Ecuador’s default reduced the nation’s net debt burden to 26 percent of gross domestic product in 2009 from 31 percent a year earlier, according to central bank data. The debt-to-GDP ratio, while “pretty low” will reach the “high 20s” this year and increase to about 34 percent of the nation’s GDP by 2012, S&P’s Francis said.
The yield on Ecuador’s 9.375 percent bonds maturing in 2015 rose two basis points at 6:19 p.m. New York time. The bond’s price fell 0.08 cent to 99.21 cents on the dollar. On June 15 it reached 99.6, the highest since the default. The return on the country’s dollar debt this year is the second-best among developing nations after Ivory Coast.
“People are becoming a little bit more comfortable as they’ve been continuing to pay since their default,” Francis said, referring to payments on the 2015 bonds. “Higher oil prices obviously benefit oil producers, and Ecuador is one of those countries.”
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